Second Circuit orders dismissal for lack of standing of New York DFS lawsuit challenging OCC fintech charter

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The U.S. Court of Appeals for the Second Circuit has ruled that the lawsuit filed by the New York Department of Financial Services (DFS) seeking to block the OCC’s issuance of special purpose national bank (SPNB) charters to non-depository fintech companies should be dismissed for lack of Article III standing.  In December 2017, the DFS’s first lawsuit challenging the OCC’s issuance of SPNB charters was also dismissed for lack of Article III jurisdiction.

The DFS filed the second lawsuit in September 2018 following the OCC’s issuance of a policy statement confirming that it would begin accepting applications for SPNB charters from non-depository fintechs, together with a supplement to its licensing manual describing its application and decision process for fintechs (“Charter Decision”).  Once again, the DFS alleged that the OCC does not have authority under the National Bank Act (NBA) to charter non-depository companies because such companies are not engaged in the “business of banking” as that term is used in the National Bank Act (NBA).  In rulings we viewed as clearly incorrect, the district court (1) held that the DFS had standing to file its lawsuit; (2) concluded that the term “business of banking,” as used in the NBA, “read in the light of its plain language, history, and legislative context, unambiguously requires that, absent a statutory provision to the contrary, only depository institutions are eligible to receive national bank charters”; and (3) entered a final judgment against the OCC in October 2019, thereby enabling the OCC to file its appeal with the Second Circuit.

In reversing the district court’s judgment, the Second Circuit found that the DFS’s assertion that it faced a substantial risk of injury was too speculative to meet the Article III “injury in fact” requirement.

The DFS claimed that there was a substantial risk that the Charter Decision would enable fintechs with SPNB charters to escape its regulatory jurisdiction by claiming federal preemption.  The Second Circuit observed that no non-depository fintech had yet applied for an SPNB charter and no state law or regulation had been preempted as a result of the Charter Decision.  As a result, there was currently no non-depository fintech that could claim federal preemption and thereby engage in any practice that might give rise to the regulatory harms alleged by DFS, such as charging interest above New York’s usury cap.  The Second Circuit was also unwilling to accept the DFS’s claim that the OCC was on the verge of granting an SPNB charter.

The DFS also claimed that there was a substantial risk of losing revenues in the form of annual assessments levied on DFS-regulated institutions that would not be paid by fintechs with SPNB charters.  The Second Circuit observed that “at least until a non-depository fintech that DFS currently regulates—or would otherwise regulate—decides to apply for an SPNB charter, this alleged assessment loss will remain purely ‘conjectural or hypothetical,’ rather than ‘imminent’ as the Constitution requires.”

The Second Circuit also agreed with the OCC’s argument that the DFS’s claims were not constitutionally ripe because the speculative nature of the DFS’s alleged injury made the issue premature for review.  In explaining its ripeness ruling, the Second Circuit “reiterate[d] that, even if non-depository fintechs have engaged in preliminary discussions with the OCC regarding (or submitted draft applications for) SPNB charters, DFS is still asking us to ‘entangle [ourselves] in abstract disagreements over matters that are premature for review because the injury is speculative and may never occur.’”

As a consequence of its determinations that the DFS lacked standing and its claims were not constitutionally ripe, the Second Circuit did not have jurisdiction to reach the district court’s holding, on the merits, of whether the “business of banking” under the NBA requires the receipt of deposits.  The Second Circuit noted that, in reversing the district court, it “express[ed] no view” on the district court’s NBA ruling.

The OCC’s authority to issue SPNB charters to non-depository fintech companies is also the subject of a third lawsuit filed by the Conference of State Bank Supervisors (CSBS) in D.C. federal district court seeking to block the OCC from granting a national bank charter to Figure Technologies Inc.  CSBS’s first two lawsuits were dismissed on ripeness grounds.  A motion to dismiss for lack of Article III standing filed by the OCC is currently pending.

The Second Circuit decision strikes us as clearly correct.  Accordingly, we are disappointed but not surprised that the Second Circuit did not reach the merits of whether the OCC may charter SPNBs that do not take deposits.  Our sole real criticism is that the Second Circuit did not formally vacate the erroneous lower court decision.  While the district court decision could potentially be cited in support of the DFS and CSBS positions on the merits, we are confident that the Courts of Appeals will roundly reject the argument if and when they are properly presented with the issue.  Of course, as suggested by the recent decision, it is uncertain whether a new Comptroller of the Currency, appointed by President Biden, will opt to charter any SPNBs that do not take deposits.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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